Page 418 - Encyclopedia of Business and Finance

eobf_I 7/5/06 3:04 PM Page 395

Insurance

PRODUCT AND RATINGS
Top ten U.S. property/casualty companies An insurance policy varies among states and classes of
by revenue, 2004
business; nevertheless, there are features common to all
Revenue policies.
Rank Company/Group (in millions)
• Declaration page: Names the policyholder, describes
1 American International Group $98,610
2 Berkshire Hathaway 74,382 the property or liability to be insured, type of cover-
3 State Farm Insurance Cos. 58,819
4 Allstate 33,936 age, and policy limits
5 St. Paul Travelers Cos. 22,934
6 Hartford Financial Services 22,693 • Insuring agreement: Describes parties’ responsibilities
7 Nationwide 20,558 during the policy term
8 Liberty Mutual Insurance Group 19,754
9 Loews (CNA) 14,584 • Conditions of the policy: Details coverage and
10 Progressive 13,782 requirements in event of a loss
SOURCE: Insurance Information Institute (www.iii.org)
• The exclusions: Describes types of property and losses
not covered; the states and insurers continually work
Table 2 together to make the policy more readable
Rating organizations include: A. M. Best, Moody’s, and
Standard & Poor’s. Each of these rating organizations pro-
mutual meaning that they are legally owned by policy- vides information about specific companies.
holders and consequently do not issue stock. Other forms
of structure are pools and associations (groups of insur- ROLE OF GOVERNMENT
ers), risk retention groups, purchasing groups, and frater- Federal and state governments play important roles, as
nal organizations (primarily life and health insurance). An noted earlier, in relation to health insurance and in man-
insurer within a given state is classified domestic, if aging large social insurance programs, such as Social Secu-
formed under that state; foreign, if incorporated in rity, unemployment compensation, federal deposit
another state; or alien, if incorporated in another country. insurance, and pension benefit guaranty. In these areas,
the government acts either as a partner or competitor to
the insurance industry, or as an exclusive provider. Federal
FUNCTIONS
and state governments also manage property and casualty
The key functions of an insurer are marketing, underwrit- programs, such as “all-risk” crop, crime, flood, and work-
ing (issuing policies), claims (investigation and payment ers’ compensation.
of legitimate claims as well as defending against illegiti-
mate claims), loss control, reinsurance, actuarial, collec-
REINSURANCE
tion of premiums, drafting of insurance contracts to
Reinsurance is critical to the insurance process; it brings
conform with statutory law, and the investing of funds. capacity, stability, and financial strength to insurers. The
Underwriters are expert in identifying, understanding, purpose of reinsurance is to spread large risks and catastro-
evaluating, and selecting risks. Actuaries play a unique phes over as large a base as possible. It is the assumption
and critical role in the insurance process: They price the by one insurance company (the reinsurer) of all or part of
product (the premium) and establish the reserves. a risk undertaken by another insurance company (the
The primary goal of an insurer is to underwrite prof- cedent). It enables an insured with a sizable risk exposure
to deal with and receive coverage from one insurer, rather
itably. Disciplined underwriting combined with sound
than dealing with a number of insurers.
investing and asset/liability management enables an
Reinsurance has made possible greater face amounts
insurer to meet its obligations to both policyholders and
of life insurance coverage, even though the total number
stockholders. Underwriting combines many skills—inves-
of policies fell in the early years of the twenty-first century.
tigative, accounting, financial, and psychological. While
An applicant who is an unusual risk and is seeking a pol-
some lines of business (e.g., homeowners and auto insur-
icy can be accommodated by being granted a policy with
ance) are underwritten manually or class rated, many large the insurer who can in turn transfer part of the risk to a
commercial property and casualty risks are judgment reinsurer. Reinsurance can limit the investment risk inher-
rated, relying on the underwriter’s skill, experience, and ent in high asset concentration from single products, such
intuition. as annuities. As noted in Life Insurers Fact Book:

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 395